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Property Management. Investment Properties. Norman, OK. I had a meeting with my team earlier in the week, and we were having a conversation about which new projects we were going to be undertaking. We came to a consensus on which internal project we were going to work on. We were wrapping up the meeting, and I asked, “What is the next step?” Everyone looked at me puzzled. I was sitting there thinking, we just spent 30 minutes trying to figure out the next project, and we were about to wrap up the meeting without knowing what needed to happen next.

Do you ever find yourself in that situation, whether personal or professional? You spend all this time planning out what you are going to do rather than spending time figuring out the next action step.

Breaking Down Tasks Into Actionable Steps

David Allen, who was a BiggerPockets Podcast guest, opened my eyes to this. I remember buying his book Getting Things Done around 2005 off a bargain rack at a bookstore. (Yes, there used to be places where you could go to buy books.) While I haven’t been very successful implementing all of his teachings (my label maker has about an inch of dust on it), figuring out the next action step has stuck with me.

Think of all the things that you have on your to-do list. There are probably many of you who have “buying an investment property” on your list. That may seem like something you could do, but until you figure out what the very next physical step is going to be, nothing will happen. You need to break these projects down into more manageable actions. How do you eat an elephant? One bite at a time. That is how you have to deal with these big projects.

If my project was to buy my first investment property, my first step would be to figure out my finances. My next actionable step would be to gather all of my bank accounts and see how much money I would be able to put into a property. If I had enough, I would then check my credit to see if I would be able to get a bank loan.

If my credit was good, then I would start talking to banks and see how much of a loan I could qualify for. But wait, you might even want to break down the “talking to bank” action. Maybe what you really need to do is some research first on which banks to talk to. Or maybe the first step is finding the phone numbers of the banks that you want to meet with and make an appointment with one of their loan officers. You need to drill down and figure out every next step. It takes a minuscule amount of planning to figure out the next step. This small little step keeps those projects off the shelf and allows you to move forward.

Working in Smaller Time Increments

Here is the key when you drill down and figure out the next actionable step. Let’s say your next step is calling a bank to set an appointment. How long will taking that action take you? Five minutes? Ten minutes? How long will it take you to “buy an investment property”? I don’t know. Hours? Days?

When you break down the project into smaller steps, you don’t need to set aside 4 hours to start working on that project. You can work on that project when you have 10 minutes of downtime between meetings. It gives you actionable steps where you don’t need to set aside a whole day to do something. Who can find a whole day to do anything? If you don’t break it down, then the project doesn’t keep moving because you can never find those large blocks of time to keep it moving forward.

If you don’t keep moving the project along, it eventually starts collecting dust and you never return to it. In your mind, it becomes too difficult to pick it back up. This strategy helps you keep the ball moving on all of your projects. It will keep you more productive and will help you accomplish big goals that other people think are too much to take on.

Norman, OK. Property Management. Real Estate. All the words that Real Estate Investors and Agents use can be very confusing. So here, I’ve got a list that explains the most common terms. Got questions? Be sure to comment or email us at info@netmanageok.com!

This wonderful list of definitions was taken from this post: http://bit.ly/1Esz7w4.

16 Common Real Estate Investing Terms, Defined & Explained

1. REO: Real Estate Owned

By whom, you ask? A bank or other financial institution. Why do they call it “Real Estate Owned?” I don’t know; it confused me too, to be honest! They really should call it BO Real Estate, but that would be confusing, too. All joking aside, this term is used for property that was foreclosed on by a bank that held a mortgage on the property or a tax lien holder that foreclosed.

What you need to know here is that this owner has no emotional connection to the property and is most likely not local so they have not seen its condition. Your biggest advocate to get a good deal will be the real estate agent listing it, in my humble opinion. They are the gatekeeper to the lender and can help (or hurt) your chances to get the deal so be sure to play nice with them!

2. Short Sale

This is a sales transaction where the property sells for less than what is owed to the lenders who hold liens on it. The lenders need to agree to the sell price and have to issue a “Settlement Letter” giving their consent to release their lien for an amount other than what is owed to them. These types of deals can take some time to work through the red tape with the banks and are typically coordinated by a third party.

In my part of the world, the agent listing the house has an attorney deal with the bank. The attorney even negotiates a fee for themselves in the settlement with the bank. Most short sales are handled with real estate agents these days. Right after the crash, when things were like the Wild West in real estate, many wholesalers would negotiate a short sale themselves and then resell the deal to others. I don’t see much of that in NJ, but it may happen elsewhere still. Bottom line, you can get a good deal with a short sale—if you are willing to wait for the bank to come around.

3. BPO: Broker Price Opinion

This is an opinion of the value of a piece of real estate, offered up by a real estate broker or agent. Typically you see a BPO as opposed to a full-fledged appraisal on short sales or REO deals. The BPO is not as thorough as an appraisal. Typically the broker gets a small fee and writes up an opinion of value, which is used to justify the sale. The bank will order this to confirm that the deal is being sold somewhere near market value, minus the repairs. The way you win on this is to get that BPO agent to consider the repairs the property needs. If you can, send them some pictures ahead of time!

4. NOI: Net Operating Income

This is a calculation for rental real estate. Easily explained, this is how much money you would make if you owned the property free and clear of a mortgage. The NOI is calculated on an annual basis and equals the Net Rental Income (total rent for the year minus vacancy), minus the Operating Expenses (this is all costs for maintaining the property, including real estate tax, insurance, maintenance, management, utilities, landscaping, legal, leasing commissions, etc.—everything EXCEPT the mortgage payment.) Sometimes people include “Capital Expenses” as an expense also. More on that later. For larger deals, you want to see a NOI that is between 40 and 50% of the Net Rental Income. The NOI means very little by itself, but it’s used for two very important calculations, explained below.

5. CAP Rate

The Capitalization Rate is NOI divided by the sell price or value of a piece of real estate. It is expressed as a percentage, but most people leave the percent part off when they are talking about it, i.e., “This property is a 10 CAP!” CAP rates are used to compare real estate investment opportunities. The CAP Rate is what your return on investment would be if you owned the property free and clear.

In my humble opinion, this term gets thrown around too often in our business. Some people confuse it with Return on Investment, which is very different. It also gets used on small real estate deals, like single family homes and small multi-unit buildings. I don’t think it is an appropriate way to evaluate these types of deals, and it can be dangerous to do so. A Single Family Home can have a fantastic CAP Rate, as long as it’s rented. If you have one month of vacancy, all those calculations go out the window. This is a way deeper conversation for another day, so let’s stop right there

6. Debt Service

This is a fancy way to say “mortgage payment.” It’s the money required to “Service the Debt” on the property. It includes the interest on the loan and any pay back of the loan balance (principal reduction, defined below). The NOI minus the Debt Service equals your cash flow.

7. DSCR: Debt Service Coverage Ratio

The DSCR equals the NOI divided by the Debt Service. In simple terms, it is how many times over the property can pay the mortgage payment after expenses are paid out. This number is really only important to lenders. In today’s marketplace, they want to see a DSCR at 1.25 or more. When evaluating a deal, just make sure that your DSCR exceeds your lender’s threshold. Most lenders will be able to tell you what their required number is right off the top of their head!

8. Principal Reduction

We went over this briefly; this is the part of a mortgage payment that goes towards paying back the debt. What makes this a conversation piece is how people view it. When you turn in your tax return at the end of the year, all you are able to claim as an expense when considering your Debt Service is the interest. The Principal Reduction is not an expense, it is repayment of a loan.

Some investors—and many commercial brokers trying to sell deals—will call Principal Reduction to be income. The IRS makes you pay taxes on it, so technically it is income. That being said, I always back it out of my profit calculations because it’s not cash in my pocket NOW. It’s potential future income, and there are a lot of IFs to consider before I get to hold that income in my hand. I do see Principal Reduction as a benefit, but to me it’s a part of long term wealth building.

9. $/SF – Dollars Per Square Foot

This is a great way to evaluate things like construction costs, rents, and sell prices of property. The last two apply somewhat in single family homes, and the all apply in multifamily and commercial deals. Not all properties are the same size, so comparing the cost to rehab, rent, or buy a property based on $/SF allows you to compare one deal to another. It’s also a really good “rule of thumb” to evaluate a deal, as long as the market and property type are the same.

10. Phase 1 Study

If you have only done residential deals, you may not have even heard of this one. A Phase 1 is a study to determine the potential environmental hazards that exist on a property. Things like prior uses, on site storage tanks, asbestos, and lead-based paint are taken into consideration. A lender is the one who will push to have something like this done because they don’t want an environmental issue to arise that will drastically decrease the value of the property they have a loan on.

I have had many Phase 1 studies done. One of them uncovered underground oil tanks that had leaked into the soil around the property, and another found a deposit of lead in the soil that had to be removed. If you do the study before closing, it is the responsibility of the seller to take care of remediating these issues. In my part of the world, you can get an “Environmental Review” done for less than $1,000 and a full-fledged Phase 1 done for around $3,000 depending on the size and complexity of the property. The difference is a Phase 1 considers prior uses of the property. If someone was using the address as a paint factory 75 years ago, you want to know about it. The way I look at it, it’s a very inexpensive way to uncover something that can cost you tons of money in the future.

11. Assessment

This is a term used to determine the real estate taxes on a property. The assessment has a relation to the property’s value, but is not the same as the value. Most people think they are the same thing—or close to it. That’s not always the case. It doesn’t fluctuate like the value does, and there are equations that are used to determine the assessment. Every town is different. You can call your local tax office to ask how they calculate it if you are curious. The real estate taxes you pay per year equal the Assessment times the Tax Rate. If your property gets re-assessed, your taxes are going to change. When you appeal your real estate taxes, what you are really doing is appealing the town’s assessment of your property.

12. LOL

I had to throw that one in there. If you are going to stay sane in this business, be sure to “Laugh Out Loud” at least three times a day. Doctor’s orders.

13. LTV

This is a basic one. It stands for Loan to Value. A lender will base the loan they will give you on a percentage of the property’s value. The reason I have this in this conversation is that you need to make sure you know what value they are talking about. Most banks use an appraiser. If you are using a private lender, you could mutually agree on a value based on other sales in the market (also called “Comps” or Comparable Sales). If you are doing repairs on the property, you want to know if they are talking about the value before or after the repairs (sometimes called After Repair Value or ARV). It is a basic term, but it’s one that gets thrown around without clarity sometimes.

14. Personal Guarantee

This is another one that’s very common, a term most people think they understand. It carries a lot of weight, and I take it very seriously. A Personal Guarantee is something that’s offered on a loan. It means that even though a mortgage loan is probably given to an LLC or other business entity, an individual(s) is being asked to pledge their own personal credit and assets to the loan as well. That means that you are putting your personal home, bank accounts, and any other assets you own on the line when you sign one of these. Take these seriously when you sign them!

15. Amortization

Most mortgages don’t get paid down evenly over time. Most mortgages are amortized, meaning that each month, a little more of the money you pay goes towards principal and less towards interest. At first the principal portion is not much at all. Over time, the principal side goes up and up, to the point where you build a big snowball of debt pay down each month. If you are a visual person, do a Google search for “Amortization Charts” to see this in graphic form.

16. Capital Expenses and Capital Expense Reserves (Cap Ex)

So this is another one that gets tossed around a lot. Some expenses are applied the moment you have to pay for them, like a maintenance man unclogging a toilet, an electric bill, or property insurance. Larger expenses that are considered to be a contribution to the long term value of the property are called “capital expenses.” It seems frugal but is actually unrealistic for an owner of a single family or small multi to set aside money each month for a potential roof repair or heater replacement 15 years down the road.

For larger real estate, these types of expenses come up more frequently. You need to set aside money each year for things like roof replacements, a new boiler, new windows, repaving parking areas, and common area upgrades. There should be a line item in your expenses for Cap Ex. There are plenty of rules of thumb out there depending on the type of property we are talking about. You will find numbers in $/SF or $/Unit, and they should reflect the cost of these Capital Expenditures in your local area.

When you don’t know what your real estate agent is talking about JUST ASK THEM. They do this full time and can’t remember what it’s like to know nothing. It’s their job to help you, so let them.

One of the most valuable things in life is your time. Do not underestimate how valuable your time is. With that in mind, I suggest buying close to home. Not necessarily next door, but not an hour away either. Doing so will save you tons of time, especially if you are managing the properties yourself. If a property is an hour away from you, that is two hours just to get there and back. Remember, your time is very valuable. Learn to conserve it.

You may also consider the value of a property management company. Using a property manager will reduce your drive time, reduce your headache, and you have a trusted company to run your property if or when you decide to move out of state.

Keep Properties Clustered

This tip also focuses on saving your time. Do you want to be driving all over your city to show or maintain your properties? Would it not be easier if they were clustered in one or two neighborhoods?

Don’t Buy Somewhere You Are Afraid to Visit

Seems rather obvious, but the cash flow numbers can look really appealing in rougher neighborhoods. Why? Because of two words: increased risk. Risk to your property and risk to you. If you can handle the risk, go for it. If not, think twice before buying.

You will always get a better return on your investment if you buy in an area you wouldn’t mind living. This ensures that tenants will feel safe and neighbors are pleasant.

Save for Expenses

Stuff breaks. It breaks all the time. And if you don’t repair it, you and your property can quickly fall into a downward spiral. You simply have to keep some money set aside for repairs.

Remember: Cash Flow is King

The rental property business is all about cash flow. If a potential deal does not cash flow, do NOT buy it. You do not want to be in the situation where you have to write a check every month rather than cashing one. Cash flow is king. That said…

Don’t Bet on Appreciation

Some think they can forgo the cash flow because they will be able to sell the property later for a profit. And while that can happen in red hot markets, markets are tricky and fickle. You are making a bet that you can time things perfectly. It can happen, and if it happens to you, great. Do not forget the crash of 2007 and 2008.

Write Down Your Rental Policies

Do this before you get started. What is your rent going to be? What will your income requirements be? What about past criminal offenses or evictions? How about pets? Smoking? The thing is, if you are wishy-washy about these criteria, you can be accused of discrimination and potentially fined. Determine your rental criteria now, write them down and stick to them.

This is really where a property manager comes in handy. A property manager usually has this sort of criteria in place and they would be the ones to enforce it, instead of you knocking on someone’s door.

Know the Law

First, know that Federal Law states that you cannot discriminate based upon the seven protected classes, including race, religion, color, creed, sex, familial status and national origin. Turn someone away because there are “too many” kids, and you might be in big trouble.

Plus, there are a myriad of state and local laws that spell out the eviction process, how much rent or late fees you can charge or add additional protected classes. Seems like a lot to cover and it is, but running afoul of any of these laws can be a hard lesson to learn.

Get Your Lease Reviewed

The lease is your most important document in this business. It is the contract between you and your tenant that spells out the numerous details related to renting out your property. Should you trust some boiler plate document you bought at Office Max? No, you should not. Find an experienced real estate attorney in your area and have him or her review your lease. The few hundred bucks this will be money well spent.

Start Small

Please do not go out and buy a 30-unit building as your first purchase. If you do, you are most likely setting yourself up to fail. Managing rental properties can be a tough business, and I suggest you start small, get a feel for the business and then build your way up.

If you start small you will have a better understanding of the kind of properties you would like to own, plus only dealing with one tenant at the beginning is ideal.

Think of Your Exit Strategy

One day you will likely be ready to sell these properties and move on. Who will you sell them to? Most likely to another investor. What will that investor be looking for? The same thing you were looking for — a cash flowing deal. Be sure you think about that now when you buy, rather than later when you are trying to sell.

These 11 key tips are a lot to think about and digest, but one should not blindly march forward into the real estate investing arena. The more you do on the front end, the more successful you will be on the back end.

Property management. Real Estate. Rentals. Rent Houses. Norman, OK. This post was taken from http://www.biggerpockets.com/renewsblog/2015/07/27/manage-property-answer-these-questions/. I added in my own thoughts as well.

Don’t be a PROPERTY manager; be an ASSET manager instead.

What’s the difference?

If you’re the property manager, you are the manager. If you’re an asset manager, you manage the manager.

You could manage your property(s) yourself, perhaps in order to learn how it works so that you can outsource it to a property manager later. Or perhaps you want to create your own property management company.

Before you attempt to manage your own property, ask yourself these 5 questions.

5 Questions to Answer Before You Self-Manage Your Property

Question #1: How valuable is your time?

Is it really the best use of your time to answer the phone at 10 o’clock at night when a tenant calls you that there is water coming through the roof and you have to rush to the property? Or to process applications, do background checks, show the property or collect the rent?

Couldn’t you delegate these activities to other professionals charging $15-$30 per hour?

Wouldn’t your time be better spent looking for more deals and raising money? What is an hour of THAT kind of activity worth? Fifty dollars, $100, $500 per hour?

Spend your time on HIGH VALUE activities and delegate everything else.

Your time is valuable and it is something you can never get back. EVER.

Question #2: What are your strengths and passions?

Are you good at repairing stuff? Do you love dealing with tenants and their problems? Do you love the property management business?

If you answered “yes” to these, you might want to consider starting your own property management business, which would complement the real estate business.

However, chances are you answered “no” to these questions, so why do them? Why not focus on what you’re good at and love: being a real estate entrepreneur, making deals happen, putting it all together?

Hire a property management company. They make the detail stuff easy for you.

Question #3: Are you relying only on yourself, or are you leveraging the strength of your team?

Do you have experience managing a property like this? If you don’t, do you really want to learn? If you have investors in the deal, how would they feel about you managing the property that you bought with THEIR money? Chances are, you don’t have property management experience, and therefore the risk of the project just skyrocketed. What should you do?

Leverage the experience of a professional property manager.

Use your manager’s resume to complement your own. This “partnership” makes you look stronger to banks and investors because instead of having no experience at all, you bring a track record to the table. You can say, “Here’s my team, look at our experience.” You’re mitigating the risk of the project by leveraging the strength of others.

Question #4: Is it consistent with your goals?

Didn’t you get into this buy and hold real estate thing because you were looking for passive income and to grow the business? Then why would you want to work IN the business versus ON the business? Why would you do something (property management) that doesn’t bring you closer to your goal of passive income and growing your portfolio?

Also, with regard to goals, you want to make money as quickly as possible, right? Why try to learn on the job and make a bunch of mistakes when you can hire a professional who will do a better job than you will?

Just saying.

Question #5: Are you running it like a business?

You should approach your real estate career from the perspective of an entrepreneur who wants to create and grow a business. As the CEO of this business, you’ll want to delegate those lower-value activities that you’re not good at or don’t like to do and focus on the high-value activities that actually grow the business.

Plus, real estate like apartment buildings (what I focus on) already has property management built in to its business model! It just makes sense.

Unless property management is strategic to you, it should be one of those lower-value activities that you delegate. If you do, it will free you up to do the things you’re good at and that will grow the business: looking for more deals and raising money.